- The Washington Times - Tuesday, August 21, 2001

The Federal Reserve meets again today. Based on what has transpired in both the United States and the global economies since its last meeting, another major reduction is in order. Indeed, if the Fed intends eventually to lower the federal funds rate to at least 3 percent, which was the level to which the Fed reduced that short-term interest rate following the 1990-1991 recession, it should do so sooner rather than later. Under the circumstances, knocking another three quarters of a percentage point off the federal funds rate would be appropriate.
The effects of the Fed's actions work their way through the economy following a series of lags. Rate cuts that occurred in the winter will generally not be fully felt for six to nine months, sometimes longer. Thus, there is still some monetary easing in the pipeline. But it is difficult to believe that it will be enough. The U.S. economy looks much worse today than many believed it would at the beginning of the year. Ditto for the economies of many other nations.
The Fed itself recently reported that industrial production fell for the 10th consecutive month in July. The economy continues to shed jobs; since January, total employment is down 620,000. Business investment in equipment and software collapsed in the second quarter, while the rate of increase in consumer spending slowed significantly. Exports are in trouble, and second-quarter growth might well have been negative.
The American economy is not the only one in trouble; a major factor contributing to its export problems. For the first time since the world price of oil skyrocketed in 1973 and 1974, the growth rates of the world's largest economies have dramatically fallen simultaneously. Japan's second-quarter output is projected to have fallen by 5 percent. The Italian and German economies are stagnant. Singapore, Argentina and Mexico are in recession, and Brazil is teetering on contraction. Industrial production has plunged in other East Asian countries recently, including Taiwan and Malaysia. Thus, no region of the world is stepping forward as the locomotive for the global economy.
While growth has plunged in America, the danger of inflation has substantially subsided. Both consumer and producer prices fell last month. Many commodity prices are in free fall. Pressures on profits, meanwhile, have intensified as few businesses are able to exercise any pricing power. Moreover, fiscal policy remains contractionary, even after considering the welcome, well-timed tax rebates being distributed now. Thus, the Fed must resume its aggressive stance on monetary policy. In the absence of any inflationary pressure, the Fed would not be imprudent or extremist if it chopped another three-quarters of a percentage point from the federal funds rate.


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